Colt’s eight-month journey to avoid bankruptcy

After eight months of living off loans and negotiating with investors to avoid collapse, Colt Defense ultimately bit the bullet and filed bankruptcy protection paperwork in federal court Monday.

The company is seeking Chapter 11 bankruptcy protection, which would allow it to continue to operate and repay creditors rather than liquidate all company assets. However, all major endeavors must be approved by the court.

For Colt, to support itself through the bankruptcy process, lenders agreed to loan the company $20 million to prevent layoffs of employees or board members. Yet, Colt owes roughly $270 million to 30 creditors (more than $350 million overall) and when last checked it pulled in $190.8 million in annual revenue for 2014, according to court documents.

The Connecticut-based company is seeking to implement a 363 sale of its assets, which would give it more flexibility with how assets are sold. For instance, under a 363 sale, Colt will be able to allow a “stalking horse bidder” that, in layman’s terms, allows the company to approve a first bidder.

Colt selected its current sponsor, Sciens Capital Management LLC, to purchase substantially all of Colt’s assets and assume secured liabilities. Other secured creditors will be given opportunities to bid after an auction is launched.

Part of filing for Chapter 11 bankruptcy requires a company to appoint a trustee to manage the sale of its assets, and for Colt that trustee is the international services firm Perella Weinberg Partners L.P. The firm is also working alongside the financial restructuring firm Mackinac Partners LLC, which was hired in March, and O’Melveny & Myers LLP as legal counsel.

As for which investors gets repaid first, it’s unclear. According to the Securities and Exchange Commission, creditors with the least risky investments are repaid first.

According to court documents, Colt has 30 creditors with the largest being Wilmington Trust Company, which Colt owes roughly $261 million in bond debt. Second and third place creditors pale in comparison, with Magpul Industries Corp. being owed $981,537 and Microbest, Inc. owed $755,172.

Two months before Colt petitioned the court for bankruptcy protections, it launched efforts to make the transition as seamless as possible. In April, Colt offered bondholders an option to exchange their secured notes for new ones at a higher interest rate and set to payout at a later date. However, the company found itself extending the deadline for the offer four times with little to show for it.

By June 1, the company accounted for $14.7 million, or 5.9 percent, of the outstanding principal amount of old notes, but it needed 98 percent of investor participation. In other words, the exchange offer failed to work because of a lack of interest by investors. That plan is now void.

Per terms of loan agreements, if creditors chose not to exchange notes, they still had to approve Colt’s pre-packaged plan for bankruptcy – something that was not approved despite Colt moving forward anyway. It’s unclear if there might be repercussions to the decision.

Colt filing for bankruptcy was no surprise. In late May, Standard & Poor’s Financial Services suggested to investors that buying stock in Colt would have been a last cause. The service downgraded both Colt’s debt rating and corporate credit rating to a “D” from “CC” – the lowest possible.

The company was downgraded after it missed it’s legal obligation to file financial statements with the SEC and, in large part, for failing to make a semi-annual payment to bondholders earlier that month. Standard & Poor’s views those missteps as a company in financial distress.

But missing the payment was no surprise either as the company warned investors in December during a quarterly update. Colt began its spiral toward bankruptcy just a month earlier, when it almost missed a $10.9 million semi-annual payment to bondholders. But the company secured a $70 million loan at the last minute to cover the payment and repaid a previous loan.